Housing Starts Jump

New home construction, also known as housing starts, jumped 6.8% in February to a 16-year high. January’s starts were revised higher. Most of the gains came from single-family housing starts, which have been above the one million mark for over a year. Home builders have been facing ongoing challenges from the high costs of materials added to shortages of workers and available land. The Russian invasion of Ukraine and the subsequent jump in energy and commodity prices, along with China shutting down critical factories and ports to tame COVID outbreaks, ensure builders will continue to face supply chain and price challenges this year.

Single-family starts surged 5.7% in the month, as all regions except the West experienced growth in starts. Builders have been busy keeping up, as the rise in mortgage rates and skyrocketing prices have not yet cooled demand from the wealthiest buyers and investors. The hottest regions and destinations during the height of the pandemic to work from home are now the hottest regions to rent single-family homes; buying is no longer an option for many first-time buyers in those locales. As millennials enter their prime household formation years, more demand is expected. Builders have taken notice and are offering build-for-rent investments in many communities, especially in Florida and Arizona.

Multifamily starts ticked up 0.8% in February. The multifamily rental market is experiencing a boom as well, with record-low vacancies in many markets, even in urban areas. Rents are skyrocketing as many prospective buyers have been priced out of the market. Most of the surge in shelter costs we are experiencing has yet to be felt in the inflation data; it takes a year or more for rising housing values to show up in inflation measures. Hence, the Federal Reserve’s strong pivot to battle inflation with much more aggressive rate hikes in 2022.

Separately, building permits slipped in the month by 1.9% but remained 7.7% higher than a year prior. Both single and multifamily permits fell during the month. Rising mortgage rates and high construction costs, especially from inputs like lumber, are headwinds for builders who are trying to fill the hole in supply in the existing market.

Home builder sentiment slipped again in February but still remains in positive territory. Higher home prices and rising mortgage rates are starting to dampen sales expectations. Mortgage rates are now a full percentage point higher than a year ago and will continue to climb this year; the Federal Reserve has already hiked rates by 25 basis points and has signaled six more rate hikes could come this year. The Fed has also signaled a desire to shrink its balance sheet; it would prefer to rid itself of its mortgage-backed securities first. Builders are bracing for a slowdown in demand as they work their way through backlogs.

Bottom Line
The housing market will see some cooling in 2022 as higher mortgage rates and low inventory keep many would-be buyers sidelined; investors and wealthier buyers will be able to weather the storm for longer. The war in Ukraine and China’s COVID-zero policy will continue to impact supply chains and energy and materials prices that will hamper builders’ abilities to keep up with backlogs. The lack of workers is also a concern since immigration came to a halt during the past few years.

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